Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 16 - Evidence

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-8, to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions, met this day at 3:45 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we are here to studyBill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions, more commonly known as the Bank Act.

Appearing before us today is the Honourable Jim Peterson, Secretary of State for International Financial Institutions. From the Department of Finance we also have Mr. Frank Swedlove, Mr. Gerry Salembier and Ms Rhoda Attwood.

Welcome. Mr. Peterson, I assume you have an opening statement.

The Honourable Jim Peterson, Secretary of State,International Financial Institutions: Honourable senators, I am pleased to be here with our A-team. As you know, Bill C-8 seeks to establish four principal objectives. These objectives include; promoting the efficiency of our financial institutions, fostering competition here in the domestic marketplace, empowering and better protecting consumers, and improving the regulatory environment.

First, in terms of promoting efficiency and growth, we have the new 20 per cent ownership rule. We have as well, the new holding company structure, an enlargement of the permitted investments by our institutions and of course, the merger review process itself.

Second, in terms of fostering domestic competition, there are measures here to help attract new entrants to the sector. We are expanding access to the payments system. We have a regime that will assist in the establishment of small, closely held banks such as community banks. The legislation will assist the credit union movement. This bill updates the rules regarding the entry of foreign banks into Canada, and creates a level playing field for them with our domestic institutions in terms of the updated legislation.

Third, in terms of empowering and protecting consumers, the legislation establishes a Financial Consumer Agency. This agency is an amalgamation of the three existing regulatory organs in the federal government that deal with consumer provisions. Access to basic banking services is an important part of this bill. We also deal with the question of branch closures, access, and the need for notice.

Mr. Chairman, you asked me to comment specifically on the issue of the ombudsman. I would like to make a few detailed comments about that.

We are deeply committed to the concept of a single national window for consumer dispute resolution in the financial services sector. As a matter of fact, before we tabled Bill C-38, we hired Harold McKay to bring some of the major players together to build a consensus of this one window for settling consumer disputes. The joint forum has been encouraged to determine whether governments and industry will be able to reach a consensus on new standards or, failing that, to establish a new institution to bring consumers the benefit of this single window for redress of grievances. I am very pleased that the joint forum has undertaken these initiatives with our full blessing, our participation, and our full cooperation.

As I understand it, the joint forum hopes to reach consensus on a general approach perhaps by year-end. After that, I understand that other work may be required in order to build a consensus. Other stakeholders, including provincial governments, will need to be brought into this process.

Therefore, there is some uncertainty concerning the time that the joint forum may require to reach a consensus. In the meantime, while the joint forum is working I not believe that we should stop work in establishing the Canadian Financial Services Ombudsman. We are committed to providing consumers with the benefits of this new dispute resolution mechanism. The CFSO, should be available and ready in the event that the new and better integrated approach does not emerge within a reasonable time.

I believe that CFSO could be established by some time this fall. If it is clear at that time that the joint forum is making significant progress in establishing a single ombudsman for financial services, and it appears that the implementation of the CFSO would be counter-productive to that initiative, I would be prepared to delay implementation of the CFSO. In other words, we want the joint forum to succeed.

Meanwhile, I shall do everything possible to work with the joint forum to ensure its success. This will include working with the individual members who are so important to determining the success of their deliberations. I welcome your role in dealing with the joint forum, and in encouraging its efforts to bring about something that we all feel is to be desired in this world of convergence. We want the consumers of financial services to have the benefits of one window for resolving their disputes.

[Translation]

The fourth objective of this Bill is to improve the regulatory framework governing the financial services sector. For example, the government is proposing a streamlined approvals process in order to reduce the compliance burden of financial institutions.

Some applications that previously had to be approved by the ministers would only require the approval of the Superintendent. Implementation of a new notice-based process will reduce the regulatory burden.

The Bill you are currently reviewing marks the culmination of an unprecedented process - a consultation process that began with the establishment of the Task Force on the Future of the Financial Services Sector.

You may recall that the Task Force report was examined by the Standing Committee on Finance of the House of Commons and by your committee. There were extensive public consultations and the recommendations of both Senators and Members of Parlia ment are reflected in this Bill.

The Bill you are considering today also reflects the basis of consensus reached among industry experts, consumers and Canadians through your consultations. It attempts to strike a balance between the interests of all parties and has the support of stakeholders.

[English]

The financial services sector is one of our most important industries. I do not need to remind honourable senators of this.

The financial services sector employs over 500,000 Canadians. It is on the leading edge of introducing new technologies for doing business. It is one of our truly great export industries with over 50 per cent of its revenue coming from offshore. It is a huge taxpayer here in Canada, and it is critical to the conduct of business as a financial intermediary in the services they supply to all Canadians. I am very proud to be involved and engaged with this industry. I look forward to your questions on this very important bill.

The Chairman: The minister has about one hour and a half to spend with us.

Senator Meighen: I am very interested, in what you had to say about the joint forum and the establishment of the CFSO.

I would like to ensure that I understand your comments, minister. What I heard is eminently satisfactory to my colleagues and myself.If by the fall of 2001 you are satisfied that the joint forum is making real progress, you will be prepared to delay the implementation of the CFSO. Is that correct?

Mr. Peterson: Yes, if they are making progress in creating a single window for redress for financial sector consumers.

Senator Meighen: Will you make that assessment this fall?

Mr. Peterson: Yes. I do not believe that we should place absolute deadlines on these things. It is a dynamic process and there are many competing interests. However, the objective is one to be desired, and we should do everything to aid and abet that objective.

Senator Meighen: I agree with that. Since we are all moving toward the same objective that may have some merit in indicating the steps that you expect to see.

Mr. Peterson: Yes and that is why I believe that we could benefit from your knowledge in this area, as well as any influence that the Senate might be able to exert.

Senator Meighen: The matter of 20 per cent ownership has been supported by the MacKay Task Force, the house finance committee and this committee. We all agree because we think that this will give the banks greater flexibility and permit them to enter into strategic alliances and joint ventures.

However, I do have concerns. With the degree of ministerial discretion inherent in this bill, and given the fact that we placed control requirements in the bill, we have indicated that there must be satisfactory character and integrity demonstrated by a person or group that wants to have 20 per cent. Why not also include some mention of competitiveness? In other words, perhaps the minister should have to be satisfied that the 20 per cent shareholder also enhance the financial institution's competitive ness.

The only danger I foresee is if a passive investor, who possesses great character and integrity, wants to hold 20 per cent of his shares then the objective to increase the competitiveness of the bank will not be realized.

Mr. Peterson: I share your concern about our institutions being competitive. We feel that we are ensuring their competitiveness through the guidelines that deal with the issue of control. We want to ensure that, if someone buys up to 20 per cent, there is absolutely no way that they become able to control that institution.

We feel that the help you will give to us to develop those guidelines will be valuable. It is a major concern for us that no single investor or shareholder can have control of one of these large institutions. Otherwise, there would be difficult judgment calls to make. For example: Why is a particular person acquiring these particular shares? Is it simply for passive investment, or how competitive will they become? Are we adequately equipped to deal with these difficult issues? I suppose we could deal with them, but there could be lengthy hearings. We do not have the perfect balance. However, we have opted to deal with preventing anyone holding up to 20 per cent from wresting control.

Senator Meighen: I understand the objective and I do not necessarily disagree with it. However, once it is necessary to acquire proof of character and integrity, why not at least ask the purchaser to demonstrate how their purchase will enhance the competitiveness of the institution? You feel, as I understand it, that that might be a difficult judgment call and a lengthy process.

Mr. Peterson: We want all of our institutions to be competitive on a global scale. Whether putting a government filter on it is the way to do it, I am not sure. We do want shareholders that will promote their competitiveness.

I do not know if it would be of interest to you, Senator Meighen, but our people in OSFI will be able to explain to you what this process of "fit and proper" involves.

Senator Oliver: That would be useful.

Mr. Normand Bergevin, Director, Legislation andRegulations, Office of the Superintendent of FinancialInstitutions: I believe that question was previously asked ofMs Julie Dixon. Basically, we would consider the integrity and character concerning an individual who is interested in investing at a level greater than 10 per cent but less than 20 per cent. We would make that assessment. The assessment would include both police and background checks.

In the case of a corporation, we would look at its business record, and whether there had ever been major infractions to securities laws, et cetera. If the investor is a foreign institution, we would certainly speak with the foreign regulator to be apprised of their assessment of that institution and ascertain whether they are good corporate citizens that abide by their countries' jurisdictional laws.

That is what we would do to check the character and integrity of the investor. We would not look at the other legislative conditions. We would be restricted to character and integrity and not to other conditions such as the ability to support, et cetera.

The Chairman: Who delves into the other areas?

Mr. Bergevin: The other information is for those who wish to acquire control. However, acquiring control of a large bank is prohibited by the Bank Act. Smaller banks, now part of new ownership schemes, would be examined if someone were attempting to acquire control of them. Then we would examine a full list of criteria before approving the acquisition. That would be over and above the character and integrity assessment. We would examine the business plans, intentions and many other aspects of the investor seeking to acquire control.

Senator Meighen: I will comment that most of us would prefer to see the 20 per cent in the hands of an aggressive investor - one who would contribute to the business - rather than a passive investor, who invests only for the attractive return. That is assuming that the investor is one of good character and integrity.

If an investor is required to file a business plan then, that information will be exposed. If that information is required for other purposes it should not be considered a problem for a large bank that is about to purchase 20 per cent. We want to know why they are buying it.

Mr. Frank Swedlove, General Director, Financial Sector, Policy Branch, Department of Finance: It would be appropriate if an investor were to buy a bank and control a bank. We would want to know the business plans and intentions of that investor. This is a situation where you do not want control to be exercised. You do not want that individual investor to have a business plan for that investment because there is no controlling interest. You only want him to be an active participant as an investor. However, you do not want the individual investor to be an active participant as an owner of the institution. Asking for things like business plans would be inappropriate if control were not permitted.

Senator Meighen: Perhaps we should ask about the investors intentions as an investor, rather than ask for his business plan. Twenty per cent of one of our chartered banks may not mean control. It is, however, an influential position. If a 20 per cent shareholder considers expanding into Southeast Asia, I think management is likely to listen. They may not do it, but they are likely to listen closely. It may be right or wrong, but they are still influential, as opposed to someone buying 20 per cent just for the yield and for long-term investment.

I do not think I will make much more headway on this question, but I caution you that this is an item that we should keep our eye on. The objective of this 20 per cent figure, was to help our banks get involved with other players elsewhere and to become more competitive.

Mr. Peterson: That was certainly one of the objectives of the MacKay Taskforce.

The Chairman: You all have a copy of a letter from Minister Paul Martin on this subject. Minister Martin says in that letter:

The purpose of the 20 per cent provision is to provide increased scope for institutions to participate in joint ventures and strategic alliances while preserving the benefits of wide ownership.

He says he is going to develop guidelines.

Then he said that:

...the Senate Banking committee has been an important and longstanding source of expert advice on financial issues. Accordingly, I would appreciate receiving the advice of the Senate Banking committee on the control guidelines and propose to send a draft of the guidelines when it is ready, to your committee for your consideration.

That is about as good as it is going to get.

Senator Meighen: That letter refers to the control issue more than to the nature of the investor. I am hopeful that we get some indication that we will be promoting a non-passive investor rather than a passive investor.

The Chairman: I think that is what he says. However, it is not up to you and I to debate this.

Mr. Peterson: Your input, in the context of the control guidelines, could have some reference to that issue.

Senator Meighen: If a large wealthy family, Canadian or foreign, wanted to place some of their wealth in one of our large banks that would be equal the 20 per cent figure. I am not sure that that is really what the legislator had in mind when drafting this legislation, but it may be perfectly acceptable.

Mr. Peterson: What about one of our pension funds?

Senator Meighen: Exactly.

Mr. Peterson: What about one of our big corporations? There is a range of possibilities here, some of which you may find acceptable, some of which you may not. Maybe this can emerge from your discussions. The main thing is to ensure that no one gets control.

Senator Meighen: We could sit here and debate what control is, could we not?

Mr. Peterson: You will and we will look forward to the results of those deliberations.

Senator Meighen: Why are the two large demutualized insurance companies treated differently in this bill, minister? The minister can remove the restrictions any time he or she wants, as I understand the bill. We have two companies that are subject to these restrictions and then another one, Great West Life, for example, that is not. Why not? When someone asks that question, what is the answer?

Mr. Peterson: We have never had symmetry and perfection in terms of the legislation affecting our financial services sector. It would have been much easier if every one of these insurers fit into one box and every bank fit into one box. We have had a patchwork that has emerged over the years. It is coming together as it has not in the past.

Having said that, the reason for having the two bigdemutualized insurers widely held is that we want to ensure that there are some major players in Canada. We have imposed this widely held rule not by legislation, but by way of policy. This rule applies to acquisitions of those two big demutualized companies by Canadians or foreigners. Whether you would want to see them immediately taken over, or whether you want to see them emerge not only as Canadian players but as global players, is the rationale behind why we have chosen to put into policy that they should remain widely held.

Senator Meighen: Have you given any indication of what time period the government feels is adequate for them to stand on their own two feet?

Mr. Peterson: Again, that is difficult for us to try to guess what is appropriate. The best thing we can do is watch them closely, and be prepared to adapt as we go along. We have to look at what is happening globally.

I am very proud of the efforts being made by these big insurers. Look at what is happening to Manulife in Japan, for example. Look what is happening as some of our institutions are opening up into China. We are seeing some very aggressive international moves.

Senator Oliver: How would that change if a Canadian bank bought one of the two? How will that change?

Mr. Peterson: The possibility is that it could be grabbed up by Citibank.

Senator Oliver: I am talking about our Canadian banks.

Mr. Peterson: I do not know how you make a rule which would preclude a certain types of takeover. We feel that if the widely held rules apply to the two big demutualized companies they will be significant players in Canada.

I go back to this Senate committee. This committee looked at this issue in 1998.

Senator Oliver: The committee may have been wrong then.

Mr. Peterson: That is probably the best attitude we can bring to every decision we make, particularly in this rapidly evolving dynamic sector which must be globally competitive. This is why we must be almost agnostic and be prepared to revisit many of these issues at any time. I welcome that attitude. I propose that whatever happens, we continue to be vigilant in order to allow our institutions to adapt to what is happening globally. And then we must work with them.

[Translation]

Senator Poulin: Mr. Peterson, you referred earlier to the joint forum, and I would like to know who is participating in the forum. How does it operate exactly? We know that one of its goals is to reach consensus by the end of the fiscal year. But what is the history of the joint forum?

Mr. Peterson: I will start off and then let Mr. Swedlove complete my answer, since he is our delegate to the forum.

[English]

Mr. Swedlove: The joint forum is an organization of regulators. It includes regulators of many kinds: securities regulators, insurance regulators and provincial regulators. They haveestablished a working group to review the issue of ombudsman systems in Canada.

This working group is a subset of regulators. They have invited the federal government and industry participants to join in the group. They hope to have an open dialogue about establishing an effective ombudsman system in Canada.

The discussions have been general, so far. We have spent most of the time talking about the various ombudsman systems that do exist in Canada today. There are quite a number. They are quite different in terms of the kind of services that they provide to Canadians.

The discussions so far have been exploratory. There has been some discussion about views on the direction in which we should be heading. However, the discussions are still in their early days.

Senator Poulin: While we were hearing witnesses, one of them brought to our attention that there might be a possibility of setting up a federally regulated cooperative banking system. I am from Northern Ontario, and I must tell you that the Caisse Populaire has played an incredible role in terms of providing support to small businesses and first-time homeowners. I could give you thousands of examples. Could you explain to us the process that is presently in place?

Mr. Peterson: I agree with you. Let me give you a brief background. We had two major thrusts to help the co-operative sector expand. One was the national services entity that was set up to give these small independent co-ops some size and benefits of scale. The other thrust was to establish a co-op bank.

We had a working group on this issue of a co-op bank. Unfortunately, the major players became disinterested in it and left the working group. We still think it is very important to try to develop a model. We did not want to hold up the entire financial services package because of that setback.

As soon this is resolved we will have a timetable prepared that will include the proposals that we see going ahead. They will need to be worked out with the various sectors and players, including the provinces because we are treading on provincial territory. We want to have that as an option for the cooperative movement. We will see a detailed timetable as to how we hope to proceed on that by this fall.

Senator Poulin: I look forward to following it closely.

Mr. Peterson: We do hope that there is a bigger buy-in by the cooperative sector.

Senator Angus: Minister, as you know, we have been having extensive discussions about your bill. You have no doubt been apprised of the course of events.

Mr. Peterson: We have been watching you like a hawk.

Senator Angus: That is good. We are glad that you are here while our attitude on this committee is well known. I would like you to hear elaborate on something that Mr. Cullen, told us when he appeared. By the way, he gave a very good presentation.

Mr. Peterson: He always does.

Senator Angus: It was the first time that I heard him. My understanding from his presentation, inter alia, was that this legislation would not enact a mirror image of what we see in the United States, the U.K, Germany or other countries. The other countries I mention have big financial institutions with which we have regular transactions. He was not concerned about this because, as he said, Canada is unique in its large landmass, its concentrated population, and other parameters that we all know to be particularly Canadian. Included in that particularity he discussed our banking system.

Several years ago, this committee travelled in Europe and elsewhere. We were told that if there is anything good about Canada, it is its banking system and we should not muck it up. It was an admonishment to us. I believe that Mr. Cullen was saying that we appear to be out of sync with the financial services legislation that is developing in other countries. However, that may not be a bad thing.

What are your comments in that regard? As you know, I did argue strenuously in my speech at second reading that there does not seem to be a vision in this legislation. Even thoughthere are 902 pages of technical stuff, which I know is the fruits of hard work and consultation between the institutions and the hard-working officials of the Department of Finance, there does not seem to be an overriding policy that permits us to look to the future.

We cannot see a framework for where Canada is going. I still feel that way. I am confused by it. I am pleased that you are here today because I am sure that you have had to make the case for this legislation around the cabinet table.

Mr. Peterson: I can only give you my personal views.

Senator Angus: Those are more or less the government's views?

Mr. Peterson: They may change, depending on whathonourable senators say.

Our vision is reflected in this bill in terms of the need to be globally competitive. We need to put more muscle into our domestic system by creating more competition here. We believe that competition is good.

I will give you an example. We have seen foreign banks come in here and start electronic banking. It did take long before all our banks were into it. We know that competition produces muscle. Competition ensures that our consumers have world class service. In this regard, I would stack our financial institutions up against most others in the world.

We have made some minor adjustments in terms of basic access to bank accounts. We did not do this by legislating. We did it by signing a memorandum of understanding with each of the big deposit-taking institutions. Each institution set its own adjustments

We have streamlined the regulatory process. I want those who make the actual decisions to feel free to think globally. We have a great regulatory system here in Canada. It is respected around the world. We have seen this.

I recently returned from speaking to the Federal Reserve Bank. We were invited there because of the high regard they have for Canada's financial services sector.

As far as thinking about what the future holds, we are pretty sophisticated in our financial services sector here in Canada. There are many people in the world who have never heard of a bank, insurance products, investment products, stocks orsecurities. I have a sense that in the future there will be an incredible amount of business to be done using our expertise and knowledge. This bill creates a framework for our institutions. As well, it allows us to be proactive globally, and I believe that to be an asset.

I will give you an example. As you know, the Toronto school is a joint venture between the World Bank and York University. I cannot remember the figures now, but they have had well over 250 graduates from something like 86 different countries. These students have attended the school for a five-day case study program. This is opening up Canada's financial services to regulators from 86 countries around the world.

OSFI has been sending its' people abroad and bringing people here for training as part of that outreach program. I am delighted that John Palmer chaired a group of consolidated regulators who had a major conference here in Canada. It is another way to learn.

Paul Martin has taken a leadership role in the G8. He is becoming the chair of the G20. They are working with partners around the world to try to prevent the problems of an international financial crisis.

These are very important steps that are part of a huge picture in which Canada is playing a leadership role far beyond our size and far beyond our financial muscle. It is one based on expertise and respect. We will continue to do it.

Part of the vision that I see for the future involves the government working in all those ways with our great financial services sector.

Senator Angus: That is very interesting, minister. I appreciate your thoughtful response. Let us me just try to narrow it down a bit. We have heard from witnesses and from others that the bill is not very well liked. However, we have been advised by those same groups that, they do not want us to impede the bills' passage because even though it is very technical it does have some very good points to it. They hope that the government will come back soon with a different package that is more suitable for them.

However, we have not been able to get too many specific descriptions of what would be more suitable for them. I am beginning to subscribe to the kinds of things that you and Mr. Cullen have suggested. What I am reading between the lines is that we have to be careful. It is steady as she goes. We want more competition, but we do not want it to go too fast in terms of turning our banks loose to either join together in combinations or to go abroad and get swallowed up by Citibank or the like. Because when people say to me, "Senator, you have read the bill. You have heard the witnesses. Is Canada in favour of mergers or not?" I do not know the answer to those questions. I asked Mr. Cullen and he could not answer the questions either. He said that there is a process for review, so you can imply that at least we are contemplating there might be an application for a merger. The banks tell us it is much harder to merge now than it was before.

Mr. Peterson: We have said that mergers are certainly a legitimate business strategy, which is why we have put in place a very transparent process by which there can be no doubt as to what steps will have to be taken for that to take place. Honourable senators, will have a role in that, and I am delighted that you will.

Senator Angus: So are we. We all work together. We worked together on on the last go around when the banks here and told us that they had to be allowed to join together otherwise they would not be able to compete in the global marketplace. They told us that we had to let them come together or else they would fall behind other banks and end up in trouble. The government's response to this seemed to be "So what. We do not care if we have a bank that is fifteenth, or sixtieth or eightieth in the world in size."

The banks seem to be alive and well and earning good returns on investment, although, their returns are not as high as they say they should be. I hope we get a case so we can see how it works. However, I appreciate your answer. I understand you appreciate our interest. We love Canada; all of us do. Perhaps this idea of a vision for the future is easier said than done. I empathize with you and your people in that regard.

Mr. Peterson: We shall work together.

[Translation]

Senator Hervieux-Payette: Minister, I am very pleased to see that two organizations will be responsible for ensuring that funds will be protected - in other words, there is some ongoing monitoring of costs. Your colleagues know that this is a concern of mine because sometimes cost-effectiveness is not always a consideration.

In that regard, the new legislation will cover small banks, medium-size banks and large banks. I would like to know whether the level and cost of the regulations associated with these three sizes of banks will be proportionate to their size. We are talking about very significant costs. I realize we have to be concerned about public protection, but I am wondering whether the costs will be weighted based on the size of the various banks?

Mr. Peterson: That is a good question, and I am very glad that Mr. Bergevin is here, because he is responsible for that specific matter.

It is more difficult to design a regulatory system for large institutions than it is for small ones. However, small institutions have caused a great many problems in the past. The minimum capital amount has now been set at 5 million dollars, and we realize that this will likely cause regulatory problems for the Superintendent. But he has accepted it. We have taken this course of action in order to be more competitive here in Canada.

Mr. Bergevin: In terms of OSFI's costs - and here I am not necessarily speaking for the new agency, but rather for OSFI - our costs are currently proportional to the size of the institution. For deposit-taking institutions, banks, trust companies and lending institutions, our premiums are based on the average asset base of these institutions in the previous year.

For insurance companies, the cost is based on company premiums. The larger the company, the larger the amount of OSFI premiums they have to absorb.

In recent years, we have also undertaken other initiatives to cover our costs through a user-pay system. When institutions approach us regarding transactions that require approval, we ask the institutions to cover the actual cost of that application. That is how we recover part of our costs. At the end of the year, OSFI does not turn a profit; it simply passes on its costs to the industry, which contributes based on a pre-determined formula set out in the regulations.

Senator Hervieux-Payette: There you're talking about the direct operational costs associated with your structure. However, regulatory costs within a company are higher than the cost of simply monitoring that company. All the work, the discipline and the staff a bank has to have to provide you with those data probably cost much more than it actually costs you to receive and analyze the data. So, they will have to provide the same reports and the same detailed information. A small institution may be more of a risk for investors, but I think the committee's primary interest was in having institutions that were prepared to take more risks. We can assume that these people will expect a more attractive and higher return, which would mean that we might expect to have institutions charging more but serving primarily a business clientele.

However, if we want the system to work, we have to ensure that the regulatory burden is not excessive, so that the business can have a return closer to that of these institutions. Otherwise, this will go nowhere. Few investors will be interested in starting up a small bank. Will our regulatory system focus on the large banks or the small banks, or will we see some adjustments to your regulations?

Mr. Bergevin: We do not try to block initiatives at the political level of government. Our role is to try and support any initiative that fosters competition. We are currently reviewing the types of reports that institutions are required to file. If we see a proliferation of new small institutions, we will clearly have to adapt our monitoring system to the size of those institutions.

Mr. Peterson: We are currently looking at this whole issue with a couple of key banks. There is no doubt that the current regulatory system is too cumbersome. We have done what we can to improve it, but it is important to remember that the system must protect the clients.

[English]

Senator Kelleher: My first question is a supplemental to that of Senator Angus. You stated, and I accepted, that you would like to see our banks grow and become competitive and effective. You would like to see the banks be able to bulk up.

You say this, yet we are one of the few countries in the world that applies a capital tax on our banks. We have numerous ownership restrictions. We do not permit our banks to sell insurance. We do not permit our banks to be involved in car leasing. I list those restrictions as a start.

Our competitors around the world do not have theserestrictions. What will we do to slowly permit our Canadian banks to have fewer restrictions?

I am a little fearful of new legislation to permit this in light of the past history of legislation in this field. I know you are not totally to blame for this, but I am concerned.

You say you want to see us bulk up and be competitive. I agree with you, but we are faced with these restrictions. Our foreign competitors do not have those restrictions. What plans does the government have in your department to take a look at these other areas?

Mr. Peterson: Senator, I am glad that you mentioned capital tax. The capital tax that remains in place is deductible for federal purposes. We took off the tax that was not deductible. That was part of our reform of the corporate tax structure. We felt that these capital taxes were perverse. We want our banks to be well capitalized so that they are sound, but then we were taxing them for doing it.

Most of the burden of capital taxes is at the provincial level.We hope that the provinces will follow our lead. I would hopethat your pronouncements and persuasiveness with provincial counterparts might be part of the solution of having a competitive capital tax regime. It should be a regime that is not perverse to our intent.

I will turn to the issue that you raised on business powers, including insurance and auto leasing. All of us in this room are politicians. I know that you bring your best judgment to bear on these issues.

Senator Kelleher: I hate to admit this, but in this particular instance you have far more power than I have. Therefore, I am looking for leadership from you as the government.

Mr. Peterson: You have pointed out some of the competitive realities of banks in other parts of the world. This will continue to be an issue with which we will need to deal.

Senator Kelleher: I will not flog a dead horse but...

Mr. Peterson: I do not think it is dead.

Senator Kelleher: I was hoping I would get that from your answer. Let us turn to another topic. We have the policy of disallowing mergers or acquisitions of big banks by big insurance companies and vice versa. Why did the government choose to leave this as a policy and not legislate it? Is there a reason for that? Did you want to retain flexibility in this area?

Mr. Peterson: Yes, Senator Kelleher, this was debated at length. This is an important issue. It is an entire regime for demutualization. We left that matter as policy for exactly the reason you articulated.

We believe that with technology and globalization changing things so quickly in this sector, we must have a regulatory regime in place that is flexible. Much to the consternation of the leader of the House, we have retained five-year sunset reviews of this particular legislation. I think that is unique in the world.

Second, we have made the commitment that we will revisit this legislation at any time that it needs to be reviewed. It is important to have your input as part of this ongoing review.

Third, we built flexibility into this regime in terms of regulation-making power, so that we can act more quickly. Regarding the matter to which you referred, there is no concrete policy. In that way, if situations change, we can adapt quickly to them.

Senator Kelleher: It is a double-edged sword; putting more detail in the regulations than in the bill. However, a number of our witnesses have testified before us that they are not too sure of what to be critical, because it will all be contained in the regulations, and they do not know what those regulations will state. They know that the government is working on them.

This is always a concern for legislators. I cannot quote our chairman word for word, but some of us have concerns that so much is contained in the regulations that the legislators are losing a certain amount of power. Somehow, while we are not against the policy, in order to protect the concerns of the legislators, we must have some sort of power to examine these regulations before they are promulgated. What do you think about that concern?

Mr. Peterson: I have always believed that regulations can be far more important than the statutes, depending on the context and the issue. In all my time in Parliament we have probably not paid enough attention, at the committee level, to regulations that have subsequently come down. We are accustomed to looking at bills, because they require our stamp of approval before they can be passed. I make these comments in the context of this bill.

I would welcome your ongoing review of the regulations, as they are promulgated, and before they become law. I welcome the benefit of your input, including the fact that you might want to hold public hearings. Your input will be important to us.

Senator Kelleher: I am hopeful that we will be able to hold you to your fine words in this respect.

Mr. Peterson: Absolutely. It means a great deal of extra work for you, and I know that you have the expertise and experience to carry it through.

Senator Kelleher: I thank you for those encouraging words.

[Translation]

Senator Setlakwe: Minister, my question deals withcooperatives that will be subject to the banking regulations. What kind of connection do you make between this new banking system and the Caisses populaires or credit unions in Quebec?

Mr. Peterson: My impression is that the Caisses populaires are not interested in becoming banks. As you know, the Caisses populaires have a substantial market share in Quebec and have really succeeded in creating a second tier of financial services for the province of Quebec. Financial services of this kind are not available elsewhere in Canada, and because of this competition, my feeling is that consumers are quite well served by it. However, some small cooperatives would like to set up a bank, but we have not yet promulgated the documentation regarding the possibility of establishing cooperative banks such as currently exist in Europe. We are working closely with them to offer them greater opportunities and more flexibility to operate differently.

Senator Setlakwe: You mentioned the possibility ofcompetition with provincial legislation.

Mr. Peterson: I do not think so, because the cooperatives really come under provincial responsibility. That is why we have to cooperate with the provinces and our counterparts in every jurisdiction. We will certainly do that, and we clearly must do that.

Senator Poulin: Minister, the Caisses populaires have a unique and very rich history here in Canada. Because of advanced computer technology and globalization, the assets of the small credit unions are such that we have to consider whether they are still able to survive.

Small credit unions play a very important role in every small town where they operate. Our country still has a great many small towns. You can certainly understand our concern with respect to the unique role of small credit unions.

For example, a young couple I know bought their first house three years ago. They went to each of the major banks in the town, but were unable to secure a loan because both were self-employed workers. No bank was willing to give them a mortgage for the purchase of their first house, unless the parents co-signed. I suggested they go and see the Caisse populairein their village. Well, they went to the Caisse populaireand 15 minutes later, they had a mortgage. That young couple is doing very well now and has a very positive relationship with that credit union.

In this era of globalization and new technologies, what can we do to ensure that we are meeting the needs of individuals that live in small communities? That is our concern, Minister.

Mr. Peterson: You have raised a couple of different questions, Senator Poulin. One of the major challenges facing us is to ensure that basic banking services are available in every village and town. That is why we have to provide notice before a branch can be closed. Our notices are posted in the post office in small towns and villages.

The real problem with cooperatives is that they have considerable expenditures but little income to ensure that they are cost-effective, like the large institutions. That is why we created an institution like the National Cooperative Service, so that they can benefit from economies of scale by working together. We will continue to work closely with them, because they provide an alternative.

Senator Poulin: I agree, Minister, and that balance gives the financial sector the flexibility it needs to be competitive internationally. Having read the bill, listened to the views of witnesses and consulted industry stakeholders, I am convinced that this legislation will meet the four broad objectives that you outlined. I am also confident that you, as Minister, will do your utmost to strike a balance between the needs of Canadians living in both small and large communities and those of large companies subject to the forces of globalization. That will be a major challenge.

[English]

Senator Oliver: Mr. Minister, my three questions have been asked, therefore, I will be brief.

Please elaborate on your answer to the last question asked by Senator Kelleher. My concern is regarding parliamentary over sight. We must ensure that we avoid government by regulation. With Bill C-8, we are merely passing a framework bill. The real meat will come with the regulations.

You have indicated that you would appreciate any input that this committee has to give. You recognize that this is an onerous job. However, are you prepared to make a commitment that you will table the regulations pursuant to Bill C-8 before this committee, so that we can have an opportunity to review them, perhaps call witnesses, study them and make recommendations to the department and the government?

Mr. Peterson: As I understand the process, and Ms Attwood can tell me if I am wrong, we bring forth regulations and table them. They are in the public domain for 30 days, or sometimes up to 90 days.

Senator Oliver: I am talking about before gazetting.

Mr. Peterson: Before gazetting? You raise a question that is applicable not only to this bill, but to the way that we delegated legislation or regulations.

The question is when should it be made public? When a bill goes to a public body, such as the Senate or the House of Commons, I assume it becomes a public matter. Do we pre-gazette before we gazette?

I must confess that I do not feel comfortable enough with the overall parliamentary procedure to suggest that we want to change the existing way. My hope is that when we bring forward regulations you are given ample notice to look at them. Then, having been given ample time, you could act on them and give us the benefit of your wisdom and experience. Perhaps you could hold hearings on them.

There are regulations coming forward and we would welcome your advice on them. You will need to act quickly, but I think that we can all act quickly when dealing with important issues. Of course, that is what we are paid to do.

There is that 30-day period before the regulations became final and we would welcome your input during that time.

Senator Oliver: Will you send a letter to the chairman indicating that the view and the consideration of the Senate Banking committee will be considered, particularly in relation to the regulations of Bill C-8? These regulations are so important particularly for holding companies and so on.

Mr. Peterson: They are. I have no objection to sending you a letter, but I want to assure you, honourable senator, that my appearing before you and saying this is as binding as whatever might be put on paper.

Senator Kelleher: We are concerned about a cabinet shuffle.

Mr. Peterson: I am, too. Now you know why I am here. I need your help.

Senator Tkachuk: We will make a deal, you write some letters, and so will we.

Mr. Peterson: If I write a letter, will you promise not to write one?

Senator Kelleher: I could not resist.

Senator Tkachuk: I have several questions. I want to follow up on that joint-forum forum. You mentioned that you did not want to impose a deadline, but do you not think you are forcing the joint-forum forum to rush its work by stating you intend to commence establishment of the CFSO this fall?

Mr. Peterson: Let me clarify that. I do not want to unduly rush a process if it has any chance of success. Since it is the only game in town that is able to work, I want it to succeed. In terms of our own timetable, if the bill is passed some time before summer, it would take three months or four months before we could put a CFSO into place. That is assuming it is the only game in town.

I believe that we have the obligation to start to put those pieces into place, at least as a fallback, in case the joint-forum forum does not have improvements upon the CFSO. We have promised to do this and it has received the approbation of honourable senators, consumer groups and the House, as well.

I do not know what the dynamics of the joint-forum forum are going to be. They will be meeting on June 4, 2001. I hope that we see some real progress coming out of their third meeting. That would be a great sign to us all.

Meanwhile, I want to encourage it to be successful.

Senator Tkachuk: My concern is, minister, that these bureaucracies take on a life of their own. Once you give CFSO the word to organize, they will have people, space, equipment and administrative heads. And then the joint-forum forum gets involved in a turf war.

My view is that, if it is sitting in the bill, and even if nothing is done, it is common knowledge that by the stroke of a ministerial pen it could be done. I urge you not to start CFSO until you give the forum a good opportunity to complete the task. Then, they could work together on putting it together rather than having two different forces trying to meet in the middle, which will not work.

Mr. Peterson: I really appreciate your support for the work of the joint-forum forum to try to achieve a single window for the financial sector consumer.

I must say that I am proud of the work of the Canadian bank ombudsman. It seems to have done a good job for consumers. The institutions have not complained about it. I think that they feel that whatever is good for their consumers, is good for them. Therefore, I have not had complains from the institutions about it. As a matter of fact, I have received some praise for it. I believe that the model is a good one

We might face some entrenched industry interests that prefer to stay with a silo approach where every industry has its own dispute resolution mechanism. I believe that this approach is costly because it involves overlap and duplication. Consumers will eventually pay for this overlap.

I believe that, with institutions converging and providing a greater range of financial services today, it becomes more and more difficult for the consumer to find out where to seek redress. Perhaps it depends on the product they bought, rather than who they bought it from. The sooner we can achieve that type of objective, the better off we will be.

I can assure you that I want to work to achieve that end, and I am glad that you do also. Your advice on the progress will be welcome. Perhaps you have some of the participants in the joint-forum come before you to find out how things are progressing. I can assure you that I am consulting with them on a constant basis. I am hopeful that some things will emerge but, as Mr. Swedlove has pointed out, there are certain big differences right now.

Senator Tkachuk: I will move to move to the topic is of competition. The ING Bank brief it was stated:

that there is little in this legislation that creates a more level playing field, or exposes the traditional larger banks to more international competition in a way that may bring benefits to Canadian consumers of banking products.

That is a strong statement.

The ING Bank was quite bold in its criticism of the bill. The co-operative institutions and credit unions are concerned that we have not yet put together the mechanisms that will enable them to have co-operative banks. The discussions have been, taking place since 1968. We should be able to do this. We have moved further ahead in our efforts for the banks to merge. I congratulate the government on making it easier for this to happen and for making the regulatory burden lighter so as to allow new Canadian entrants to the marketplace. However, we have banks such as ING, the Bank of Hong Kong and a number of foreign banks that have complained. ING in particular, complained about regulations, the capital tax and the lack of consideration for the fact that they area large bank and are treated like a new entrant to the marketplace.

There are two issues. First, there is the issue of regulation. What is the government doing to move more quickly to the comparable position of the bank regulators in the United States? The Canadian regulators know what the U.S. regulators are doing, or what other foreign bank regulators are doing, and vice versa. It seems to me that if we want competition, we will have to do that. I do not see this happening.

Second, I do not understand the capital tax. I do not know why governments have it in place, outside of the fact that they want more money. It seems like an unfair tax. I would like your comments on those two issues. Please tell me what the government is going to do about them.

Mr. Peterson: We addressed capital tax two budgets ago. The federal capital tax has disappeared. That was the tax that the banks complained about. That tax is still in place at the provincial level and as a result we have made representations to the provinces. I am hopeful that there is progress on this because it is a perverse tax. Mr. MacKay has also pointed out. We want institutions to be well capitalized, particularly when there are economic downturns. When times are good, you have to prepare the institutions for those downturns. To make them pay to be safe is just stupid. It is a large burden on the banks. I hope that the provincial capital taxes will end. I hope that you can send a strong message to the provinces that these taxes are perverse. I also hope that you use your clout in your respective provinces to have this tax stopped.

As to the foreign banks, such as the ING, you can look at the proposal and see that we should have opened up even further to foreign banks. We have created a level playing field for foreign banks coming into Canada. You will see suggestions that it might be good to let them compete at the retail level, as bank branches. This was one of the suggestions the other day. The United States and Australia do not allow this.

It has been suggested that if Canada removed the one other regulatory barrier and allowed foreign banks to branch in Canada at the retail level that it would create a whole second-tier bank system at the retail level. I am not quite that sanguine about it.

We would be facing huge regulatory risks. The proposal was that we rely on a foreign regulator, not ourselves, to supervise these branches. If for instance, it it was a Barclays Bank, would the Canadian depositors be able to rely on foreign deposit insurance? The British banks are quite well regulated. However, would we accept the Japanese banks, which are among the biggest in the world? Would we accept the American banks, when they do not accept ours?

I am not ruling this out. However, this is an important issue that must be discussed. Other countries must come together with us, otherwise, our banks will be at a competitive disadvantage on their home turf. I will always fight that type of situation. Our larger bigger vision is to reduce regulatory barriers and of have a more global approach to regulation.

Much of that is coming from the Bank for International Settlements. We are working together with our counterparts in other parts of the world to unify minimum capital standards. We thought we had an agreement, but some people are balking at those standards. Much work has gone into that, and we still have much work to do. That is part of the future work agenda.

When can we accept, on full faith and credit, the opinions of foreign regulators? That applies not only to banking, but in areas such as health, too. These are tough issues.

The Chairman: Mr. Minister, thank you for being with us.

Senators, this is the proposed agenda for the remainder if the day. First, I will read into the record eight submissions pertaining to the bill. You have copies of them. The submissions received were from: Mr. Jim Roach; Ms Julie Burch, Program Manager, Women and Rural Economic Development; Mr. Garry Loewen, Executive Director, North End Community Renewal Corporation; Mr. Ron Grant, President, Future Forestry Services Cooperative Limited; Ms Melanie Conn, Director, Women Futures Community Economic Development Society; Mr. Terry Hand; Mr. Jerry Botti, General Manager, Community Futures Development Corporation of Nadina; and Mr. Walter Hossli. These submissions will be read into the record.

Senators, we will proceed with clause-by-clause and then we will read the observations of the committee. Your group and mine have agreed on four committee observations, which means that we have consensus. There are two minority observations. Deputy Chairman, Senator Tkachuk, has suggested a fifth observation. I talked to my people, and we agree with it. There will be five committee observations and two minority observations.

Senator Tkachuk: That is correct. The letter from Finance Minister Paul Martin will be attached to the report.

The Chairman: The observations do not form part of the body of the report. I will sign the report and then they will be appended.

The Chairman: Bill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.

Is it the intention of any honourable senator to propose an amendment?

Hon. Senators: No.

The Chairman: Shall the title stand postponed?

Hon. Senators: Stand.

The Chairman: Shall clause 1, the short title, stand post poned?

Hon. Senators: Stand.

The Chairman: Shall clause 2 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 3 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 4 to 6 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 7 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 8 and 9 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 10 to 12 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 13 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 14 to 16 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 17 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 18 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 19 to 21 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 22 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 23 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 24 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 25 and 26 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 27 and 28 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 29 to 31 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 32 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 33 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 34 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 35 to 571 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 572 to 583 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 584 to 592 carry?

Hon. Senators: Agreed.

The Chairman: Shall clauses 593 and 594 carry?

Hon. Senators: Agreed.

The Chairman: Shall schedules 1 to 3 carry?

Hon. Senators: Agreed.

The Chairman: Shall clause 1, the short title, carry?

Hon. Senators: Agreed.

The Chairman: Shall the title carry?

Hon. Senators: Agreed.

The Chairman: Shall the bill carry?

Hon. Senators: Agreed.

The Chairman: Does a senator wish to propose to append observations to the report on Bill C-8?

Senator Tkachuk: Yes.

The Chairman: You will need to provide me with the wording of the fifth observation. The first four observations of the committee are:

1. When future legislation is brought about establishing a consumer complaints body, and following the recommendation of the joint forum, the Senate Banking committee believes, that in addition to the provisions for monetary penalties for lack of compliance with relevant Acts, the government should consider other penalties against financial services institutions andindividuals working for them.

2. The committee has, in the past, recommended that the maximum ownership levels of large banks by a single individual or entity be raised to 20 per cent. The rationale behind this recommendation was to increase the possibility of acquisitions, strategic alliances and joint ventures, both foreign and domestic, which could enhance the competitiveness of both the institution and the financial services sector as a whole. Bill C-8 does not reflect this rationale. The committee, therefore, believes that the minister should institute a policy restricting all such holdings to those that have the potential to enhance the competitiveness of the bank.

3. The committee believes that the minister has struck a balance for the immediate future regarding the Canadian Payments Association and the potential to designate payments systems in the future. The committee, however, believes that the next review of the financial services sector should contain the designation of additional payments systems with the intent of increasing competition in the business of electronic payments.

4. Following the testimony of the Credit Union Centraland CS Co-op, the banking committee remains convinced that the consultation process, with a view to establishing a national co-operative bank, should continue. To this end, the banking committee would like a letter of commitment from the minister that a timetable for this process will be established as soon as possible.

Senator Tkachuk will provide the wording for the fifth observation.

Senator Tkachuk: The intent of our observation is that draft regulations be tabled before our committee before they are gazetted, so that we are able hold hearings on them. That was not made clear by the minister today.

The Chairman: That will be observation number 5 of the committee.

The Chairman: Will you repeat that, please?

Senator Tkachuk: The draft regulations will be tabled before our committee, before they are gazetted.

The Chairman: Do you wish to read your two minority observations, Senator Tkachuk?

Senator Tkachuk: For the record, yes. They are as follows:

1. That the Minister exercise power to revoke the widely-held requirement for large insurance companies under section 407 of the Insurance Company Act. The ministry reconsider policy of "big banks not buying big converted mutual insurance companies" because a policy such as this as unfair and anti-business. This should ensure that there is a level playing field between large converted mutuals and other large insurance companies.

2. Regarding the merger review process, in order to remove the politics from the process, the minister's discretion should be removed from the merger process, allowing the process in the guidelines, as set out, to take place, with proper analysis completed by the different responsible bodies. The minority believes that if the committee was able to remove the ministerial discretion from the process, to be purely a review body, the merger should not be laid before either House of Parliament.

The Chairman: Thank you. Are there additional comments?

Honourable senators, we need a motion that the committee authorize the staff to make minor typographical and grammatical corrections, as required.

Senator Oliver: I so move.

The Chairman: All in favour?

Hon. Senators: Agreed.

The committee adjourned.